How Tax-Free Withdrawals From a 529 Plan Work

What counts as a tax-free withdrawal from a 529 plan

A tax-free distribution from a 529 plan is money you withdraw without owing federal income tax on the earnings. The earnings are the investment gains your account accumulated — the difference between what you put in and what the account grew to. You can always withdraw your own contributions tax-free; the tax break applies to the growth.

The IRS allows tax-free withdrawals only when the money pays for may have access to education expenses. These are specific costs at an accredited college, university, trade school, or K-12 school. If you withdraw money for something else, you owe income tax on the earnings portion plus a 10 percent penalty on those earnings.

The list of may have access to expenses has expanded in recent years. It now includes tuition and fees, room and board (if the student is at least half-time), books and supplies, computers and equipment, up to $35,000 in student loan repayment, and up to $35,000 in transfers to a Roth IRA (subject to annual contribution limits). Each of these has specific rules about timing and documentation.

Key Takeaways

• Tax-free withdrawals cover only the earnings on your 529 account when you use the money for may have access to education expenses at an accredited school.
• may have access to expenses include tuition, fees, room and board, books, computers, student loan repayment up to $35,000, and Roth IRA rollovers up to $35,000.
• If you withdraw money for non-may have access to expenses, you pay income tax on the earnings and a 10 percent penalty on those earnings.
• You must keep receipts and invoices showing what the money paid for, because the plan or your tax return may be audited.
• Unused 529 money can now roll into a beneficiary's Roth IRA without tax, a change that took effect in 2024.

How the tax-free amount is calculated

When you make a withdrawal, the IRS treats it as coming partly from your contributions and partly from earnings. If your account has $50,000 in contributions and $10,000 in earnings, and you withdraw $12,000, the IRS considers $10,000 of that withdrawal to be contributions (tax-free) and $2,000 to be earnings (taxable unless used for may have access to expenses).

The plan custodian — the company holding your account — calculates this split using a formula based on your account balance at the time of withdrawal. You do not choose which part comes out first. This matters because if you withdraw for a non-may have access to reason, you cannot avoid the tax by claiming you withdrew only your contributions.

When you use the withdrawal for a may have access to expense, the entire amount (contributions and earnings) is tax-free. You do not owe tax on the earnings portion. This is the core benefit of the 529 plan.

What happens if you withdraw for a non-may have access to expense

If you take money out and do not use it for a may have access to education expense, the earnings portion becomes taxable income in the year you withdraw it. You report this on your federal tax return. The tax rate depends on your overall income that year.

You also owe a 10 percent penalty on the earnings — not on your contributions, only on the growth. If your account earned $10,000 and you withdraw it for a non-may have access to reason, you pay income tax on the $10,000 plus $1,000 in penalty. Your contributions come out free and clear.

Some withdrawals are penalty-free even though they are not may have access to expenses. These include withdrawals made because the beneficiary received a scholarship (you can withdraw the scholarship amount penalty-free, though you still owe tax on earnings), or because the beneficiary died or became disabled. You still owe income tax on the earnings in these cases — the penalty is waived, but not the tax.

Documenting may have access to expenses for tax purposes

The 529 plan custodian does not verify that your withdrawal actually paid for a may have access to expense. You make that information. But if your return is audited, the IRS will ask you to prove it. Keep invoices, receipts, tuition bills, and any other documents showing what the money paid for and when.

For room and board, you need to show the student was enrolled at least half-time and that the expense was reasonable. The school's cost of attendance estimate (which it provides to all students) is usually accepted as reasonable. For books and supplies, keep the bookstore receipt or the school's bill. For a computer, keep the receipt and document that it was used for school.

If you claim a student loan repayment as a may have access to expense, keep the loan statement showing the payment was made and the amount. The same applies to Roth IRA rollovers — you will need documentation from the IRA custodian showing the transfer occurred.

The difference between may have access to and non-may have access to withdrawals

Withdrawal Type	Tax on Earnings	10% Penalty on Earnings	Documentation Needed
may have access to education expense	None	None	Receipt or invoice showing expense and amount
Non-may have access to expense	Yes, at your tax rate	Yes, 10%	None required, but keep records in case of audit
Scholarship received (penalty-free exception)	Yes, at your tax rate	None	Scholarship award letter
Beneficiary died or disabled (penalty-free exception)	Yes, at your tax rate	None	Death certificate or disability information

Rolling unused 529 money into a Roth IRA

Starting in 2024, you can move unused 529 money into the beneficiary's Roth IRA without owing tax or penalty. This is a major change that lets you salvage a 529 account if the beneficiary does not use all the money for school.

The rollover is subject to annual Roth IRA contribution limits — for 2024, that is $7,000 per year (or $1,000 if the beneficiary is under 50). You can roll over more than $7,000 in a single year, but only $7,000 counts toward that year's contribution limit; the rest carries forward to future years. The 529 account must have been open for at least 15 years, and the money must have been in the account for at least five years before the rollover.

This option avoids the tax and penalty on earnings that would otherwise explore if you withdrew the money for a non-may have access to reason. However, the Roth IRA has its own rules about when you can withdraw money without penalty, so rolling over does not mean the money is when ready accessible.

Frequently Asked Questions

Can I withdraw 529 money for graduate school?

Yes. Graduate school tuition, fees, and related expenses at an accredited institution are may have access to expenses. Room and board for graduate students follows the same rules as undergraduate — the student must be enrolled at least half-time and the amount must be reasonable based on the school's cost of attendance.

What if the student gets a scholarship and I have unused 529 money?

You can withdraw up to the scholarship amount penalty-free, though you still owe income tax on the earnings portion. Any remaining balance stays in the account. You can also roll unused money into a Roth IRA if the account meets the age requirements, which avoids both tax and penalty.

Do I report the withdrawal on my tax return?

If the entire withdrawal is for may have access to expenses, you do not report it. If part of it is for non-may have access to expenses, you report the earnings portion as income on Form 1040 and pay the 10 percent penalty. The plan custodian sends you a Form 1099-Q showing the withdrawal amount; use that to calculate the taxable portion.

Can I use 529 money to pay for a computer at home?

Yes, if the student uses it for school. You need to document that the computer was purchased for educational purposes and used primarily for coursework. A receipt showing the purchase and a note about its educational use is usually sufficient. Gaming computers or devices used mainly for entertainment would not may have access to.

What if I withdraw money but do not end up using it for school?

You owe income tax and a 10 percent penalty on the earnings portion. Report the taxable earnings on your return for the year you withdrew the money. The penalty is calculated on the earnings only, not on your contributions. If the withdrawal was due to a scholarship, death, or disability, the penalty is waived but the tax remains.